From 1 January 2010 investors will be able to benefit from a clearer system of compensation limits.
The level of compensation for savers following the collapse of Northern Rock and Icesave was headline news, but recent changes affecting investments drew barely a murmur.
On 24 April, the Financial Services Compensation Scheme (FSCS) confirmed its proposed new compensation limits for investments, but blink and you may have missed them. When I Googled the changes, all I found was a link to a press release on the FSCS's own website.
The best thing about the new rules, to be introduced on 1 January 2010, is their simplicity, which is something you don't always get to say about regulatory changes.
Currently, the FSCS reimburses 100% of the first £30,000 of any losses, and 90% of the next £20,000 -- £48,000 in total. That fussy two-tier system is to be scrapped, and from January, it will simply compensate 100% of all investor losses up to £50,000.
Different rules for pensions
These changes apply to fund managers but not life insurers, who are covered by the FSCS insurance sub-scheme.
Currently, if your pension provider collapses you might get 90% of the first £2,000 of any losses and 100% thereafter. More fussiness. From January you may get up to 100% of any losses, and as before, with no upper limit.
In practice, the FSCS will try to transfer your existing policy to another insurer, or arrange for an insurer to issue a substitute policy.
Know the risks
Investing in shares is riskier than leaving your money in cash. To put it crudely, when Northern Rock collapsed, savers got all their money back, shareholders got nothing.
In February, the High Court ruled against two hedge funds and 150,000 small shareholders, who were claiming the Government had cheated them by seizing their shares in the bank.
Many were pensioners who had received the shares when Northern Rock demutualised a decade ago, and relied on the regular dividend payments to supplement their income. Now they may get nothing at all.
These shareholders didn't barricade local branches or hold branch managers to ransom, but perhaps they should have done.
Still, investors also bleed, and have a right not to lose their money if an authorised financial services firm goes insolvent or sparks a mis-selling scandal, and may get compensation if they do.
When does it pay?
The FSCS will compensate if you have lost money at the hands of an authorised firm due to bad investment advice, poor investment management, misrepresentation or fraud, or because it can't return the investment or money it owes you.
It won't pay out because one of your investments has underperformed, or because you failed to take account of a projected shortfall.
Most investment claims handled by the FSCS relate to advice, for example, if you were advised to buy an endowment policy, but it was wrong for your risk profile and you lost money as a result.
If your stockbroker defaults you should get all your money back, independent of the FSCS, because it should be in a separate client account. But if your broker had run off with your money or defrauded you, the FSCS would protect you up to that £48,000 limit (£50,000 next year).
Which is tough luck if your stockbroker ran off with more than £50,000.
Scandal, scandal, scandal
The FSCS paid out an estimated £1 billion in compensation between launch in December 2001 and September 2008.
It has tackled a series of mis-selling scandals in that time, including The Pensions Review, mortgage endowments, freestanding additional voluntary contributions (FSAVCs), structured capital at risk products (precipice bonds) and split capital investment trusts. It wasn't involved in the rescue package for Northern Rock.
Many of these cases still rumble on. In 2007/08, the FSCS completed 13,625 mortgage endowment complaints, supporting 45% of them, with an average payout of £1,800.
It also completed 3,470 splits complaints, compensating 16% with an average £5,500 payout.
And it tackled 1,520 general investment complaints, compensating 27% with an average payout of £15,150.
Even Pensions Review and FSAVC cases still rumble on, with 505 claims completed (and 390 new claims received), of which 75% led to compensation. The average payout £27,750.
With no fresh mis-selling scandal emerging, investment claims actually fell by 42% last year, from 22,790 to 13,275.
But don't worry, I'm sure they'll be another one along in a week or two.
And then came the credit crunch
Since September 2008, the FSCS has dished out more than £20 billion in compensation, mostly for Bradford & Bingley, Heritable, Kaupthing Singer & Friedlander, Landsbanki (Icesave) and London Scottish Bank. The huge sums has so far been funded largely from loans rather than the standard route of levies and recoveries.
Compensation for the actions of investment intermediaries is a drop in the ocean by comparison. The FSCS expects to pay between £40m and £70m after declaring Pacific Continental Securities in default in January. So far it has received 400 claims from people sold inappropriate investments, or who want property, cash or shares returned. Total claimants could rise to more than 4,000.
The FSCS also estimates that it could pay between £5m and £15m following the liquidation of Square Mile Securities.
Save the savers!
Perhaps the real difference between deposits and investments is that when it came to the crunch, the Government ditched the £50,000 compensation limit to offer limitless protection to savers.
Investors can't bank on such largesse. Those with larger portfolios should be aware of the danger this poses to their wealth.
Just as many savers split their money between different institutions, investors should also consider avoiding putting all their eggs in one basket.
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